France's Hollande has tight window to step up reform pace

PARIS (Reuters) - The coming weeks will tell whether Francois Hollande can pick up the pieces of his accident-prone presidency and start to pull the euro zone's second-largest economy out of decline. It may be his last chance to do so.

The new year could hardly have started worse for the French leader, who failed to keep a promise to the nation to halt the rise in unemployment by the end of 2013 and is now dealing with media allegations of a secret love affair.

Photos in a celebrity magazine published last week purporting to show a nocturnal visit by Hollande to a mistress risk stealing the show on Tuesday when he faces media for up to two hours in the traditional start-of-year news conference.

Hollande's office has complained of breach of privacy but issued no denial. Yet with polls showing most French are blase about his private life, the real question is whether he will use the media event to show he is ready to tackle the double burden on the French economy: rising taxes and public spending.

"As is often the case, there are good intentions. But we will judge the deeds," said analyst Bruno Cavalier at Paris-based Oddo Securities.

The Socialist Hollande, who in his 2012 election campaign labelled the world of finance his enemy, ignited speculation of a U-turn with a New Year's address to the nation offering business leaders a "responsibility pact" trading lower taxes and less red tape for company commitments to hire more staff.

Striking a new tone which has already raised hackles with unions, he also declared it was time to stamp out the abuses of France's generous welfare state, and cut public spending so as to create room for tax reductions after a series of rises.

Some see echoes of the about-turn made 30 years ago by Hollande's mentor Francois Mitterrand, who in 1983 halted a policy of nationalisation and expansion of worker benefits just two years into his mandate as public finances crumbled.

About time too, say those who argue that public spending at around 57 percent of national output - some 12 points more than that in Germany - is a burden the economy cannot afford. French debt at 93.4 percent of GDP and rising is now "in the danger zone", the national audit office warned last week.

"FRANCOIS BLAIR" OR FRENCH GERHARD SCHROEDER?

The prospect of a policy shift has been applauded by France's main employers federation Medef, due to start talks in coming week with Hollande's government on tax cuts it hopes will restore corporate margins among the weakest in Europe.

Left-wing newspaper L'Humanite dubbed him "Francois Blair" after the centrist British prime minister who dreamed up "New Labour" pragmatism, while others asked whether Hollande would follow the reforms implemented in Germany in the last decade.

"What indeed if, after 18 months of empty words and drift, Francois Hollande became the French Gerhard Schroeder?" Marc Touati of the ACDEFI economic consultancy asked, referring to the Social Democrat ex-chancellor who implemented painful labour market reform in the 2000s.

But he predicted: "This is a sort of bluffing tactic intended to gain time, soften up ratings agencies and investors but which will not result in hard measures."

Such scepticism is understandable. Pension and labour reforms implemented last year, while significant first steps, have hardly broken the mould. Projected 2014 French growth of just one percent will struggle to create private sector jobs.

So far, this year's budget foresees public spending cuts of 15 billion euros or some 0.7 percent of GDP. Yet the government still has to explain how the bulk of these will be achieved before it goes on to examine further possible cuts.

Moreover the rapprochement with business risks alienating the moderate CFDT trade union which has so far been a vital ally to Hollande, backing pension and other reforms despite resistance from other, more hardline, labour organisations.

"I am issuing a warning: the trade unions have got to be players in all this," CFDT Secretary-General Laurent Berger said last week, insisting there could be no "blank cheque" for companies without benefits to labour as well.

Hollande always said his strategy was to reform in the first half of his five-year mandate and reap the benefits in the second half. But time is running out if he is to set down a marker for more action this year.

Local elections to decide who runs major French cities are to be held in March, followed by European Parliament elections in May where the far-right is seen doing well. Any policy shift must be well bedded-down before then.

"We believe the political agenda is at risk of completely freezing up in the run-up (to the elections)," Barclays economist Fabrice Montagne said.

"However, the president has a window of opportunity in January's round of New Year wishes to clarify the government's policies and intentions before the start of the campaign."

Hollande may conclude he has nothing to lose now from taking a few risks. A survey by pollster Ifop released in the Journal du Dimanche newspaper this weekend showed little impact on his poll ratings from the allegations of a secret affair.

With Hollande currently enjoying little more than 20 percent of support, Ifop deputy chief Frederic Dabi noted: "He is already so unpopular that it hasn't changed anything."